Bidders for Satyam

Larsen & Toubro

The $7 billion engineering and construction giant, Larsen and Toubro (L&T), having earlier acquired a 12 per cent stake in Satyam Computer Services, is widely perceived as the front-runner to buy out the troubled IT firm.

L&T, in fact, had categorically expressed its interest to the government in acquiring management control in Satyam. It has invested around Rs 670 crore in the company so far. However, L&T CMD A M Naik later told reporters in Mumbai that many things had changed over the past few weeks, and that some key clients had moved out, as had some key employees.

L&T, meanwhile, sees a lot of synergy between the core strengths of the beleaguered software giant and that of L&T Infotech, its unlisted information technology subsidiary. “Satyam has a huge focus in the enterprise application space and the engineering segment. These two complement L&T Infotech, as a large chunk of their work also comes from ERP practice,” said a banker. Satyam’s ERP business accounted for 45 per cent of revenues, whereas engineering solutions contributed about 6.5 per cent.

“The other thing is that Satyam will bring in horizontal solutions capability to L&T like business intelligence. In case L&T takes over Satyam, we feel that the transition will be smoother and faster too,” said an analyst. “For L&T, Satyam makes a strategic fit. The company will get access to new verticals and service offerings like semiconductors and discreet manufacturing, as well as entry into new geographies,” added Sabhyasachi Satpathy, director, Mindplex Consulting.

“If L&T becomes Satyam’s suitor, then it will not only add about a billion dollars to itsrevenues, but will also have to absorb Satyam’s 50,000 employees. This is difficult, but if this happens, then L&T will benefit the most from this deal, as cultural integration between them is not be a problem,” said Vinu B Kartha, Partner at advisory firm Tholons.

Based on data available, interactions with some bidders and Satyam’s current clients, independent technology and market research firm Forrester believes that L&T is the front-runner to acquire the troubled company.

“Among large Indian business conglomerates”, reasons Sudin Apte, head of Forrester India, “Larsen & Toubro is a clear leader here”.

By and large, all firms in this camp will be in a position to shell out the required money, possibly even at a premium. Larsen & Toubro has the most service overlap and relevant IT industry experience. Its corporate reputation, ability to manage mergers and acquisitions, and overall reputation in Indian industry, including relationships in government agencies, make it the most likely winner in this group, says Apte, adding: “Its early approach to other investors like LIC will make it easier to pull through the 31 per cent equity deal.”

A recent report by Kotak Institutional Equities, however, states that while L&T Group has the resources for acquisition, it would be better if the group uses it to address the challenges the core business is facing. The company, states the report, has outstanding liquid mutual fund (MF) investments of Rs 4,000 crore at the end of FY08, in addition to cash of Rs 1,000 crore and a gross debt-equity of 0.4X at the end of the same period.

Tech Mahindra

Another strong contender is the Mahindra and Mahindra group’s IT business, Tech Mahindra. While the company has kept its options open, they are also hesitating as there is no clarity on Satyam’s customers, employees and the liabilities.

“For Tech Mahindra, this will be a good diversification strategy. It is way too dependent on one sector, telecom, and one client,” said an analyst.

The other concern for M&M will be raising capital for the acquisition. As of December 31, Tech Mahindra had cash and cash equivalents of only $110 million. Moreover, Fitch has downgraded the company’s rating in the light of its race for Satyam. This could hamper its prospects of raising money overseas.

Moreover, Deepak Parekh, member of the Satyam board, is also on the board of Mahindra and Mahindra since 1990. If Tech Mahindra decides to bid, it could raise a concern at transparency and corporate governance. However, Parekh may not participate in decisions on the bidding process.

Wilbur L Ross & Co

Wilbur Ross & Co, a private equity firm run by US billionaire investor Wilbur Ross (pictured), is understood to have expressed interest in bidding for Satyam.

While there has been no official confirmation, the PE firm, which had invested $80 million in SpiceJet last year, is understood to be joining hands with Cognizant to bid for Satyam.

Ross is known for restructuring failed companies in industries such as steel, coal, telecommunications, foreign investment and textiles. He specialises in leveraged buyouts. In 2005, Forbes magazine listed Ross as one of the world’s billionaires for the first time.

Starting in the mid-70s, Ross built his reputation as the country’s foremost bankruptcy advisor. For three years, he ran a private-equity fund within Rothschild. In 2000, he bought out his equity fund and started W L Ross & Co in New York with $440 million in investor money, and a staff that included four top managers, who, along with Ross, make up the firm’s investment committee.

Ross entered India with the acquisition of OCM India for $37 million (around Rs 170 crore then) in cash. The acquisition was developed by W L Ross’ $300-million India Asset Recovery Fund LP, with co-investment from WLR Recovery Fund III LP and the Housing Development Finance Corporation (Deepak Parekh is also of chairman of HDFC).

Cognizant

Nasdaq-listed Cognizant Technology Solutions is understood to be in the race to acquire Satyam and has an “arrangement” with private equity firm Wilbur L Ross & Co.

Cognizant was started by Satyam and Dun & Bradstreet Corporation (D&B) in 1994. D&B had a 76 per cent stake in that venture, called Dun & Bradstreet Satyam Software (DBSS), while Satyam held a 24 per cent stake. D&B bought out the stake from Satyam after the second year of operations and Cognizant was formed.

“Cognizant is heavily tilted towards the BFSI and healthcare segment and, in terms of geography, the US is their main focus. Acquiring Satyam will automatically give them entry into enterprise applications like SAP and the manufacturing space. Besides, Satyam has a much better geography spread,” said a research analyst

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